Lending spigot opens

By Lorraine Woellert

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Posted Nov. 14, 2012 at 12:01 AM

Posted Nov. 14, 2012 at 12:01 AM

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By Lorraine Woellert

Bloomberg News

WASHINGTON — A rebound in U.S. auto sales has been buoyed by the return of easy lending, even to borrowers with flawed credit histories. Some economists question whether the gains can be sustained without a boost in hiring.

Auto loans were up 5.5 percent in the second quarter from the same time last year, with riskier buyers accounting for 43.9 percent of the total, up from 42 percent in 2008, according to Experian. By contrast, hourly wages for non-managers climbed 1.1 percent on average over the past 12 months, the least since records began in 1965, Labor Department figures show.

The financing spigot opened as Federal Reserve efforts to keep interest rates low prompted investors to pour money into securities backed by subprime car loans in search of higher returns, giving the auto industry and the economic expansion a lift. That may no longer be enough to fuel purchases as wages are held back by a pool of 12.3 million unemployed Americans.

"If you want to take it to another level of sales, you want to see more of the fundamental drivers of consumption improve more materially, things like income and employment," said Jacob Oubina, senior U.S. economist at RBC Capital Markets in New York, the bank with the third-best forecasts for consumer spending, according to Bloomberg calculations. "With credit flowing again to subprime, you've had the wherewithal to bridge that gap to execute on pent-up demand. That takes you only so far."

While pent-up demand, aging automobiles, and low borrowing rates are boosting U.S. auto sales, support for the market also is coming from an abundance of easy money as global investors, similar to mortgage-bond speculators before them, search for yield.

Issuance of auto-loan securities is up almost 60 percent so far this year from a year ago, to $61 billion, making car loans the biggest class in the $200 billion asset-backed securities market, said Harris Trifon, a debt analyst at Deutsche Bank in New York. Offerings of subprime auto debt are up 50.9 percent from the same period in 2011, to $12.2 billion, he said.

On Wall Street, demand for auto debt is "extraordinary," said Trifon. "It's opening up different financing channels to a bigger universe of borrowers."

The average credit score of a new-car buyer has dropped to 753 this year from 762 in the second quarter of 2011, according to Experian, a Dublin-based credit services company. For used cars, average scores have fallen to 662 from 671.